Walgreens profit rises in Q2; unveils blockbuster partnership

By Mike Troy

New York -- Walgreens reported a better-than-expected profit on flat sales for its second quarter Tuesday morning and unveiled an expanded partnership with AmerisourceBergen that could give the pharmacy operator an equity position and seat on the drug wholesaler’s board.

Sales during the company’s second quarter ended Feb. 28, were flat at nearly $18.7 billion with samestore prescription sales down 2.7% and same-store front end sales down 2.6%. The prior-year comparison period included an extra day in February 2012. However, earnings per share adjusted to exclude several one-time charges increased 9% to 96 cents, three cents better than consensus forecasts, from 88 cents the prior year. Adjusted net income increased 19.3% to $915 million from $767 million.

"We are pleased with the quarter’s results as we saw substantial strength in our pharmacy performance, leading to strong earnings growth," said Walgreens president and CEO Greg Wasson. "With our Balance Rewards program now totaling more than 60 million enrollments, our preferred status with four national Medicare Part D plan sponsors and our very successful flu shot program this year, our customers are responding to our purpose to help them get, stay and live well."

Walgreen’s results continued to reflect the impact of increasing generic drug usage. The number of prescriptions filled at the company’s 8,072 stores during the quarter increased 6% to 208 million even though same store pharmacy sales declined. Walgreens said it grew its market share by 50 basis points to 19.2%. The company also noted that it administered seven million flu shots during the quarter compared to 5.5 million the prior year. Despite the gain, the company said fewer customers shopped its stores with traffic down 5.2% from the prior year. The decline was offset somewhat by a 2.8% increase in average transaction size.

In conjunction with the release of its financial results, Walgreens and its strategic partner Alliance Boots announced a sweeping new arrangement with AmerisourceBergen. Less than a year ago, Walgreens acquired a 45% stake in Alliance Boots and the companies announced a strategic partnership to create the first global, pharmacy-led health and wellbeing enterprise. Under the agreement the companies announced Tuesday morning, Walgreens will expand its existing relationship with AmerisourceBergen into a 10 year comprehensive primary distribution agreement for branded and generic pharmaceutical products. In addition, Walgreens and Alliance Boots will collaborate with AmerisourceBergen on global supply chain opportunities and will have rights to acquire a minority equity position in AmerisourceBergen that will give both companies one seat on the drug wholesaler’s board.

"Today’s announcement marks another step forward in establishing an unprecedented and efficient global pharmacy-led, health and wellbeing network, and achieving our vision of becoming the first choice in health and daily living for everyone in America and beyond," Wasson said. "We are excited to be expanding our existing relationship with AmerisourceBergen to a 10-year strategic long-term contract, representing another transformational step in the pharmaceutical supply chain. We believe this relationship will create a wide range of opportunities and innovations in the rapidly changing U.S. and global health care environment that we expect will benefit all of our stakeholders."

The deal will substantially alter how Walgreens sources prescription products. Currently, the company relies on AmerisourceBergen for specialty items, but the new deal is a 10 year comprehensive arrangement that for branded and generic pharmaceutical products. The portion of the agreement relating to branded products Walgreens has historically sourced from distributors and suppliers takes effect September 1. Over time, beginning in calendar year 2014, AmersourceBergen will increasingly provide generic pharmaceutical products that Walgreens historically has self-distributed.

It is believed the new relationship will enable Walgreens, Alliance Boots and AmerisourceBergen to benefit from greater scale and global opportunities and work together on programs to improve service levels and efficiencies, while reducing costs and increasing patient access to pharmaceuticals. The companies contend the arrangement will help address global health care challenges by making it easier for manufacturers to bring products to market; increasing accessibility to the benefits of global sourcing and best practices for community pharmacies; and providing patients with better access to health care. The collaboration is also believed to generate opportunities to attract partners in new markets and prospects in existing markets around the globe.

"We strongly believe that our new partnership with AmerisourceBergen will deliver long-term shareholder value by creating an unmatched network of companies that is well positioned to anticipate increasing market needs and expectations across the world," said Alliance Boots executive chairman Stefano Pessina. "Together we will bring tailored solutions to business partners, including manufacturers and pharmacists, as well as to patients and consumers."

AmerisourceBergn president and CEO Steven Collis called Walgreens and AmerisourceBergen undisputed leaders in health care and said the new arrangement would create unique opportunities to unlock value in the pharmaceutical supply chain.

"This new relationship will significantly strengthen and grow our core business and increase our ability to deliver innovative solutions to our customers, and long-term benefits to all of our stakeholders. Importantly, these agreements not only expand our U.S. business, but also provide opportunities to meaningfully grow our specialty and manufacturer services businesses internationally," Collis said.